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Strategic sourcing: Pennywise but pound foolish?

Hear Jason Miller's report.

The General Services Administration says the strategic sourcing initiative for
office supplies has saved $39 million over the last 18 months and is on track to
save $208 million by 2013.

And office supplies are just the beginning of the products that soon will be part
of the governmentwide Federal Strategic Sourcing Initiative (FSSI). The Obama
administration plans to use the power of the government's size to buy everything
from print management to mobile devices and services to IT hardware.

But some small businesses not on the contract are demanding the White House step
back and analyze the
broader, unintended costs of these efforts. A growing number say they are
in grave danger of losing their businesses, and thousands more could be right
behind them.

Bonnie Whittaker says Adams Marketing is one of those small businesses. Whittaker,
the company's vice president for federal sales, said Adams Marketing's revenue
from the sale of office supplies under Schedule 75 to federal agencies dropped by
about 30 percent
to $9 million in 2011, and things only are getting worse in 2012. She said her
company has earned about $3 million through the first two quarters.

"We've had to lay off five people because our sales have dropped so much," she
said in an interview as part of Federal News Radio's week-long special report, Inside the
World's Biggest Buyer.

Adams Marketing is not alone. According to StopFSSI.org, there are
hundreds of
other companies whose revenue has dropped from as much as $19 million to
$20,000
between 2010 and 2011 because of the FSSI blanket purchase agreement (BPA) for
office supplies.

15 vendors win BPA

GSA awarded the BPA to 15
vendors, including 13 small businesses, in June 2010. The administration is
strongly encouraging agencies to use the BPA to buy office supplies because of the
potential lower costs.

GSA, under direction from the Office of Federal Procurement Policy, recently
awarded commodity contracts for IT hardware such as mobile devices and tablet
computers, and other BPAs are coming for computers, monitors and video
teleconferencing equipment. These contracts are separate from the FSSI initiative.

"It's important to understand price is only one of FSSI's key priorities. Socio-
economic goals, including small businesses, understanding the government's
spending patterns, ease of use and removing government cost drivers are other key
goals," said Steve Kempf, commissioner of GSA's Federal Acquisition Service,
Thursday before the House Small Business Subcommittee on Contracting
and
Workforce. "To accomplish these goals, on each specific initiative, we work
closely with other agencies to develop features and requirements as well as obtain
industry feedback and expertise. This thoughtful process has resulted in
significant savings and smarter acquisitions in all of the initiatives we have
undertaken."

In 2009, vendors under Schedule 75 accounted for about $690 million in sales for
office supplies, with small firms receiving more than $472 million (68 percent),
according to GSA's sales query tool. But in 2010 with the award of FSSI, small
firms not under the BPA saw their market share begin to drop, and by 2011,
agencies spent $121 million under the BPA and $465 million under Schedule 75. GSA
and the firms expect those numbers to continue to come together.

Rick Vogel, a federal government sales manager for Coast to Coast Computer
Products in Simi Valley, Calif., and one of the commodity IT winners to provide
tablet computers, said the impact of the office supplies BPA on small firms is a
microcosm of things to come from the administration's aggressive expansion of
strategic sourcing across the other areas.

"The fact of the matter is that there are about 15,000 to 20,000 federal
contractors out there and if they source each schedule down to even 40
contractors, you're talking about limiting that original pool of 17,000
contractors, the gross majority of which are small businesses and socio-economic
disadvantaged businesses," Vogel said. "They will be closing their doors and
laying people off in significant fashion. Our concern is not just the detrimental
effect on small businesses, but it's the effect of that loss of the jobs in the
U.S. economy as it is. We believe the programs are somewhat penny-wise and a pound
foolish in the fact that for every dollar or two they save upfront, they will be
losing that same dollar or two, or even a greater amount, through the social
programs being supported by the American taxpayer."

Vogel, Whittaker and a growing number of others believe the administration failed
to take into account the societal costs of the program.

Sam Bornstein, a professor of accounting and taxation at Kean University in Union,
N.J., and a partner with the firm Bornstein and Song CPAs and Consultants, has
been
studying the impact of strategic sourcing on small businesses. Bornstein said his
initial study of the federal initiative is showing the savings by agencies don't
present the entire picture.

"In our preliminary work, we discovered among the nine contractors that we had
personally interviewed, we found 171 jobs lost to FSSI. That is shocking,"
Bornstein said. "Based upon our preliminary research, we discovered that all we
have to prove is a net job loss of 900 jobs, this will far exceed the $16 million
of
GSA claimed FSSI savings in [2011]."

He added the costs go beyond just job losses at the effected companies.

"GSA seems to be convinced, and adamantly convinced, that the FSSI is working
well, but are not apparently aware or concerned about the off-setting factor, that
these displaced small businesses — the financial distress, the failures, the
mortgage defaults and foreclosures — and by the way, I should add, these
will impact not only the U.S. economic recovery and part of that is the housing
market because they are all interrelated," Bornstein said.

He said the administration should have had GSA do a cost-benefit analysis to
better understand the impact of FSSI.

"The idea that if you pay lower prices that some companies are going to say, ‘For
that amount of money we will have to lay off staff' and therefore you shouldn't
pay lower prices," said Gordon, who now is the associate dean at The George
Washington University law school. "I don't think you and I would do that when we
were making purchases. We wouldn't walk into CVS and say ‘I know you are selling
this product for $11, but I want to give you $15 because I want to be sure the
manufacturers' employees are well taken care of.' I don't think anybody would view
the fact that vendors who charge higher prices will be losers in a real
competition and therefore they may have economic problems. Golly, if that is taken
into cost-benefit analysis, everybody's actions would be very different and I
don't think in a good way."

Kempf said GSA did a business case around whether this makes sense for the agency
and then an acquisition strategy, but it's up to the vendor to do the cost-benefit
analysis on whether to bid or not.

"There have been some businesses that have been hurt by this and some who have
been
helped by this," he said. "In procurement, there are winners and losers, and
although it's very tough for those who do not win and can't go forward with us
into Office Supplies 2 (OS2), there are consequences to procurements, good and
bad."

Vogel, Whittaker and others say they understand the consequences of procurements,
but they believe FSSI for office supplies goes beyond simple wins and losses.

Vogel said many agencies are mandating the use of the BPA, which is taking away
business that Coast-to-Coast, Adams Marketing and others have won on the open
market. He said the departments of
Commerce,
Homeland Security,
Interior, Agriculture and the
Air Force all issued
memos to staff either requiring the BPAs use or strongly encouraging contracting
officers go to FSSI first.

Adams and Coast-to-Coast both won spots on an Army BPA for toner cartridges.
Whittaker said the Army told them recently it would cancel the BPA as of July 31
to only use the FSSI contract.

Whittaker said it doesn't matter if her prices or someone else's is lower, the
word has been sent down from above.

Even agencies, such as the Census Bureau, who have continued to use non-BPA
holders, are feeling the pressure.

"They have to go through a waiver to save $300 and it took [Whittaker's customer]
two weeks to get the waiver signed off to use my company," Whittaker said. "She
was told, ‘Don't always expect this again. We are not always going to give a
waiver because it's cheaper.' What kind of philosophy is that? Why in the world
don't they say, 'If you can find it cheaper somewhere else, go'? This is
taxpayer's
money, this is your money and mine. They are saying, ‘I don't care what the price
is.'"

Vogel, Whittaker and others say actions by OFPP and the promotion of the BPA by
GSA created a de facto mandate.

BPA accounts for less than half of market

But Kempf said if there is a mandate or even a de facto one, more sales would go
to
FSSI, but that isn't the case. GSA estimated agencies spend about $1.4 billion on
office supplies every year, but in 2011, the strategic sourcing initiative brought
in $257 million in sales.

"I would feel a lot more circumstance around this if we were seeing 90 percent of
the market going to OS2 and 90 percent going to Schedule 75," he said. "We are not
seeing that from the agencies. There still are plenty of people out there that are
not using OS2 and that aren't using schedules. There are opportunities for both
people in OS2 and on Schedule 75 for business."

Gordon said OFPP never mandated the BPA's use because they wanted agencies to make
the decision on what works best for them.

"There were agencies — I don't want to name them on the record — but
at least two
agencies where there were real disagreements," he said. "One agency did analysis
and said, 'In terms of our needs, these do not offer lower prices.' I said that
was
their decision to make. We didn't try to escalate or overrule them. Another agency
had various hesitations and we eventually discussed with them and they came up
with a plan to gradually shift over."

Kempf also said the amount of money going to the small businesses under FSSI
— 74
percent of all awards — is larger than the sales to small firms under
Schedule 75 —
67 percent. He added GSA shut off Schedule 75 to new offerors in an attempt to
protect those with schedule contracts already. In fact, GSA just last week
extended the moratorium on
new offers for Schedule 75 for another year.

Vogel said while a higher percentage is going to small firms, the number of them
eligible to compete is much lower and that is the bigger problem.

"The federal government does not have the responsibility to support everyone, but
when they were supporting 500 small firms and they take it away and send the
business to just 13, they are not being representative of supporting small
businesses," he said.

Sour grapes by unsuccessful vendors

Gordon added many of the complaints could easily be seen as sour grapes by those
unsuccessful vendors. He said OFPP and GSA were following instructions from
industry to make sure agencies used this second generation BPA.

"We went to the agencies and said, ‘If these offer you good prices, will you
really use them?' We got a whole series of agencies that said ‘Yes, we will really
use them,'" Gordon said. "Industry wanted us to say these will really be used and
we did what industry wanted, and now the losers are coming and saying, 'But, why
are you telling agencies to use these?' We did it because industry wanted us to do
it. I think we did the right thing. In retrospect, I haven't heard any criticism
that
would make me say we didn't take the right approach."

The issue of strategic sourcing and its impact on small businesses has drawn the
attention of Congress. During the House Small Business Committee hearing held last
week, quite a bit of time was spent on the impact of strategic sourcing.
Rep. Mick Mulvaney (R-S.C.), chairman of the subcommittee on contracting
and workforce, said GSA seemed to have made a good faith effort in the process.

"Whether or not there were folks who fell by the wayside or fell between the
cracks, that remains to be seen," he said. "If there are folks who feel like that
happened to them, we need to know about it. We would be more than happy to have a
follow-up hearing and figure out if that's the case or not. We are just trying to
get the facts to make sure the process is as fair as possible."

Rep. Judy Chu (D-Calif.), ranking member of the subcommittee, said the hearing
left her needing more information about whether the process was fair.

"It's actually hard to determine because it seemed as though the testimony was
night and day," she said. "The small business owner had a very different
perspective than the commissioner from GSA. I would like to hear from other small
businesses to hear what really is the truth. Just the question of whether this is
mandatory or not was in dispute."

On-ramps possible

Kempf said during the hearing GSA is considering how to add more small firms to
the office supplies BPA.

"We are looking at some of these vendor networks where they could come in with
some of the vendors who were awarded contracts with OS2," he said. "We have been
working with them and they have been under discussion with us about whether they
could partner with them and become part of the team with some of the folks on OS2.
We're still considering that and working with them."

Kempf said he didn't have a time table for when a decision would be made about how
to address possible on-ramps.

For Vogel, Whittaker and others, time is of the essence.

Whittaker said GSA could have easily kept a large number of small businesses
engaged and still gotten better prices.

"This could have all been handled by fixing GSA Advantage and the schedule
program," she said. "It didn't have to be done by narrowing the competition down
to 15, which is not going to be good. Eventually, these prices will start rising
up again, and there will be no more companies left to compete."